Present: All the Justices
COMMONWEALTH TRANSPORTATION COMMISSIONER
OPINION BY
v. Record No. 960433 CHIEF JUSTICE HARRY L. CARRICO
January 10, 1997
JAMES E. MATYIKO, ET AL.
FROM THE CIRCUIT COURT OF CHESTERFIELD COUNTY
Herbert C. Gill, Jr., Judge
Trial Court Proceedings
In the aftermath of a condemnation proceeding, the
Commonwealth Transportation Commissioner (the Commissioner) filed
in the court below a motion for judgment against James E. Matyiko,
John Matyiko, Jr., and Jerry B. Matyiko (the defendants), alleging
that they were former directors of Matyiko Investment Corp. (the
Corporation), which had been dissolved, and that they were jointly
and severally liable for an unlawful distribution of assets under
1
Code § 13.1-692. The Commissioner sought recovery of $137,965,
representing the excess resulting when commissioners in the
condemnation proceeding awarded less than the amount previously
paid the Corporation pursuant to a certificate of take.
In a bench trial, the trial court entered judgment in favor
of the defendants. We awarded the Commissioner this appeal.
Factual Background
1
Code § 13.1-692 provides in pertinent part as follows:
Liability for unlawful distribution. -- A. Unless he
complies with the applicable standards of conduct described
in § 13.1-690, a director who votes for or assents to a
distribution made in violation of this chapter . . . is
personally liable to the corporation and its creditors for
the amount of the distribution that exceeds what could have
been distributed without violating this chapter . . . .
In 1985, the Corporation, which was closely held, owned a
99.52-acre tract of land in Chesterfield County, constituting the
Corporation's only asset. On February 13, 1985, William S. Lee,
right-of-way agent for the Department of Highways and
Transportation, offered the Corporation $327,140 for an 8.05-acre
parcel needed for highway construction, including $221,375 as the
value of the needed land and $105,765 as damages to the 91.47-acre
residue.
The Corporation rejected the Highway Department's offer. On
March 28, 1985, the Commissioner filed a certificate of take in
the Clerk's Office of the Circuit Court of Chesterfield County,
certifying that the amount of $327,140 was estimated to be the
fair value of the 8.05-acre parcel taken plus damages to the
residue and that this amount would be paid by the Treasurer of
Virginia pursuant to the order of the court.
On April 15, 1985, the Corporation entered into a contract
with the Midlothian Company for the sale and purchase of the
99.52-acre tract, less that portion covered by the Commissioner's
certificate of take, for a price of $32,000 per acre. On April
19, 1985, the Corporation's directors and stockholders voted to
dissolve the Corporation and distribute all its assets. The
Corporation directed its counsel, N. Leslie Saunders, Jr., to file
a statement of intent to dissolve the Corporation with the State
Corporation Commission, in accordance with the provisions of Code
2
§ 13.1-81. Prepared by a member of Saunders' law firm, the
2
Code § 13.1-81 has since been repealed. See present
Code § 13.1-743 (1993 Repl. Vol.), which requires the filing
of articles of dissolution.
statement of intent to dissolve was filed on June 4, 1985. It
listed Joseph G. Matyiko, Sr., James E. Matyiko, John Matyiko,
Jr., Jerry B. Matyiko, and Saunders as directors of the
Corporation.
Some time prior to May 13, 1985, the Corporation filed a
petition with the trial court for leave to draw down the sum of
$327,140, set forth in the certificate of take as the estimated
value of the 8.05-acre parcel and damages to the residue. An
order was entered on May 13 directing payment of $327,140 to
Saunders on behalf of the Corporation.
The check for the "drawdown" was issued to the Corporation on
June 10, 1985. Shortly thereafter, the Corporation disbursed to
its shareholders all its assets, including the proceeds of both
the "drawdown" and the sale of the 91.47-acre residue. Joseph
Matyiko held 45% of the Corporation's stock, James, John, and
Jerry Matyiko each held 15%, and Saunders held 10%. In the
disbursement, Joseph Matyiko received $1,376,869, James, John, and
Jerry Matyiko each received $458,956, and Saunders received
$305,970.
Saunders had received his stock in return for his agreement
to represent the Corporation in matters involving the
Corporation's land. Saunders and Richard Paul Pontynen
(Pontynen), the Corporation's certified public accountant,
recommended the dissolution in order to take advantage of § 337 of
the Internal Revenue Code and avoid double taxation of the gain
derived from sale of the Corporation's land. According to
Pontynen's testimony, § 337(a) allows such tax avoidance
[i]f within a 12 month period beginning on the date on
which a corporation adopts a plan of complete
liquidation, all of the assets of a corporation are
distributed in complete liquidation, less assets to meet
claims, then no gain or loss should be recognized from
such corporation from sale of or exchange by it of
property within such 12 month period.
In addition, Saunders expressed the opinion that there was "no
chance of . . . getting less than the certificate in a
condemnation case and . . . not . . . any risk in dissolving the
Corporation." Saunders also opined that he "thought they were
looking realistically at [$]400,000" as a condemnation award.
After the Corporation distributed its assets, Saunders
continued to negotiate with Lee, the right-of-way agent for the
Department of Highways, in an effort to settle the condemnation
case. The amount initially offered by the Highway Department was
based upon an appraisal of $27,500 per acre for the Corporation's
land. When the Corporation contracted to sell the residue for
$32,000 per acre, or $4,500 per acre more than the Department's
initial appraisal, the Department took the position that the value
of the Corporation's land had been enhanced by the highway
project, rather than damaged. Accordingly, Lee advised Saunders
that the Department was willing to offer no more than $350,000 to
settle the case.
The $350,000 offer was rejected, and Saunders ceased
representing the Corporation. With different counsel representing
the Corporation, the condemnation case went to trial before
commissioners in March 1993, resulting in an award of $189,175, or
$23,500 per acre, with no damages to the residue.
By order dated March 10, 1994, the trial court confirmed the
condemnation commissioners' report and also entered judgment in
favor of the Commissioner against the Corporation in the amount of
$137,965, plus interest, representing the excess of the amount
previously drawn down by the Corporation over the amount of the
condemnation award. In the meantime, the Corporation had been
terminated by order of the State Corporation Commission entered
April 15, 1986, and, therefore, there were no corporate assets
remaining to satisfy the judgment. The Commissioner then filed
the present motion for judgment against James, John, and Jerry
Matyiko seeking to have them held personally liable for the amount
3
of the excess.
Applicable Statutory Provisions
As noted earlier, Code § 13.1-692(A) provides that "[u]nless
he complies with the applicable standards of conduct described in
§ 13.1-690, a director who votes for or assents to a distribution
made in violation of [Chapter 9 of Title 13 of the Code] is
personally liable to the corporation and its creditors for the
amount of the distribution that exceeds what could have been
distributed without violating [Chapter 9]." (Emphasis added.)
Under Code § 13.1-653, a violation of Chapter 9 may occur if, as a
result of distributions made to shareholders, the corporation
3
As noted previously in the text, the Corporation's
statement of intent to dissolve listed Joseph Matyiko, James
Matyiko, John Matyiko, Jerry Matyiko, and Leslie Saunders as
directors. However, Joseph Matyiko and Saunders were not
named as defendants to the motion for judgment in which the
Commissioner sought to recover the excess amount paid the
Corporation in the "drawdown" order. We are told in the
Commissioner's brief that Joseph Matyiko filed for
bankruptcy and received a discharge with respect to the
Commissioner's claim against him.
"would not be able to pay its debts as they become due," Code
§ 13.1-653(C)(1), or its "total assets would be less than the sum
of its total liabilities," Code § 13.1-653(C)(2).
However, because Code § 13.1-692(A) conditions its imposition
of personal liability upon a director's failure to comply with the
standards of conduct described in Code § 13.1-690, a "safe harbor"
is provided to a director who does comply with those standards.
See Curley v. Dahlgren Chrysler-Plymouth Dodge, Inc., 245 Va. 429,
433, 429 S.E.2d 221, 223 (1993). Code § 13.1-690, embodying
Virginia's "Business Judgment Rule," provides in pertinent part as
follows:
A. A director shall discharge his duties as a
director . . . in accordance with his good faith
business judgment of the best interests of the
corporation.
B. Unless he has knowledge or information concerning
the matter in question that makes reliance unwarranted,
a director is entitled to rely on information, opinions,
reports or statements, including financial statements
and other financial data, if prepared or presented by:
. . . ;
2. Legal counsel, public accountants, or other
persons as to matters the director believes, in good
faith, are within the person's professional or expert
competence;
. . . .
C. A director is not liable for any action taken as a
director, or any failure to take any action, if he
performed the duties of his office in compliance with
this section.
D. A person alleging a violation of this section has
the burden of proving the violation.
Discussion
In finding for the defendants, the trial court reviewed the
evidence and applicable statutory provisions and stated in a
letter opinion, as follows:
Defendants obtained legal and accounting advice
with regard to dissolution of the corporation. They
acted in good faith upon the recommendations of an
attorney skilled in corporate, real estate and
condemnation matters and upon the recommendations of a
certified public accountant skilled in taxation matters.
Consequently, the Defendants are protected from
liability for the debts of [the Corporation].
Quoting Quantum Development Co. v. Luckett, 242 Va. 159, 161,
409 S.E.2d 121, 122 (1991), the defendants contend that a "'trial
court's findings of fact are binding upon [this Court] unless they
are plainly wrong or unsupported by the evidence.'" Here, the
defendants maintain, "the trial court's findings of fact that the
directors 'acted in good faith upon the recommendations of an
attorney . . . and . . . a certified public accountant' . . .
[are] clearly supported by the evidence."
However, we are of opinion that resolution of one of the
assignments of error made by the Commissioner is dispositive as a
matter of law of the question whether the defendants were entitled
to rely upon the recommendations of the Corporation's attorney and
accountant. That assignment states:
The trial court erred by ruling that a corporation's
directors, who made large cash distributions to
themselves and to the corporation's attorney, were
entitled to rely on professional advice to make those
distributions even though the funds the corporation had
received from [the Commissioner] were, by order of the
court endorsed by the corporation's attorney, subject to
being refunded to [the Commissioner] upon final
resolution of the condemnation case.
With respect to this assignment of error, the Commissioner
points to the following paragraph of the "drawdown" order:
It is further ORDERED that in the event of an award
in a condemnation proceeding being of a lesser amount
than that deposited with the Court, the State Highway
and Transportation Commissioner of Virginia shall
receive the amount of such excess, and if any person has
been paid a greater sum than that to which it is
entitled as determined by the award, judgment shall be
entered for the State Highway and Transportation
Commissioner against such person for the amount of such
excess.
The wording of the order tracks the language of Code § 33.1-
128, which provides, in pertinent part:
In the event of an award in a condemnation proceeding
being of a lesser amount than that deposited with the
court, the Commissioner shall recover the amount of such
excess and, if any person has been paid a greater sum
than that to which he is entitled as determined by the
award, judgment shall be entered for the Commissioner
against such person for the amount of such excess.
The Commissioner contends that "the directors of a
corporation that receive condemnation proceeds pursuant to an
order of court that the funds are being drawn down subject to the
outcome of the condemnation proceeding [may not] rely on a
professional's recommendation that the corporation distribute all
of its assets even though the condemnation proceeding is still
pending." The Commissioner argues that in this case the
"drawdown" order placed the Corporation "on notice of the risks of
receiving the drawdown money in advance of [the] trial on the
matter," meaning "that if the condemnation award at trial is less
than the amount drawn down, judgment will be entered against the
landowner for the difference."
Yet, the Commissioner complains, "[t]he directors ignored the
drawdown order's language admonishing [the Corporation] of the
risk" and "distributed all of [the Corporation's] assets to
themselves and their attorney." If directors can do "what these
directors have done," the Commissioner cautions, "the drawdown
order is completely meaningless."
This argument brings into focus Code § l3.1-690(B), which, as
noted previously, provides that a director is entitled to rely
upon the recommendations of experts "[u]nless he has knowledge or
information concerning the matter in question that makes reliance
unwarranted." The defendants insist, however, that they "did not
know . . . there was even a legal possibility of any payback
liability to [the Commissioner]," that "they were not on notice of
the possibility of a payback liability," that they "did not sign
the drawdown order," and that their signatures appear "on no
documents [reflecting] imputed knowledge of any payback
liability."
But uncontradicted testimony at trial showed that the
defendants had actual knowledge of the provisions of the
"drawdown" order. During trial, the Commissioner's counsel asked
Saunders what advice he had given the "Matyiko brothers sitting
here about the drawdown," obviously referring to the present
defendants. Saunders replied: "We went over the drawdown, the
drawdown order, what it said and so forth." (Emphasis added.)
While Saunders went on to express the opinion, as recited
previously, that "there was no chance of . . . getting less than
the certificate in a condemnation case and [no] risk in dissolving
the Corporation," it is clear that the defendants were made aware
of the existence of the contingent liability of the Corporation
for a possible payback in the event the condemnation award was
less than the amount paid pursuant to the "drawdown" order. And,
although it is not necessary for a corporation to satisfy
contingent liabilities upon dissolution, it is required to make
provision for the discharge of such liabilities before
distributing its remaining assets to its shareholders. 16A
William M. Fletcher, Fletcher Cyclopedia of the Law of Private
Corporations § 8126 (perm. ed. rev. vol. 1995). Yet, the
defendants voted for or assented to a distribution of all the
Corporation's assets without making provision for payment of the
contingent liability.
In an apparent effort to excuse their failure to make such
provision, the defendants introduced the testimony of Neil H.
Demchick, an accountant and financial consultant. He testified
that in 1985 the payback liability of the Corporation was
contingent only and that under generally accepted accounting
principles, this contingent liability could not have been properly
recorded in financial statements. But whether it is necessary to
report a contingent liability in financial statements begs the
question whether a corporation may dissolve and distribute all its
assets to shareholders without making provision for the payment of
a liability, albeit contingent, that is imposed as the result of a
statutory provision and a court order. It should not be necessary
to say that general accounting principles cannot render
meaningless the provisions of a statute and a court order.
We conclude that, at the time they voted for or assented to
the distribution of the Corporation's assets, the defendants had,
within the meaning of Code § 13.1-690(B), "knowledge or
information" that the condemnation award possibly would be less
than the amount distributed under the "drawdown" order. And this
knowledge or information was sufficient as a matter of law to make
the defendants' reliance upon the opinions of Saunders and
Pontynen unwarranted. Since such reliance was the sole basis for
the trial court's ruling that the defendants acted in good faith
with respect to the distribution of the Corporation's assets, it
follows that the ruling was erroneous.
This results in reversal of the judgment of the trial court.
The defendants say that we should not enter final judgment in the
event of reversal but should remand because a question remains
whether James and Jerry Matyiko were directors of the Corporation.
However, no such question remains.
In their brief in opposition, the defendants assigned cross-
error asserting only that "[t]he trial court erred in receiving as
prima facie evidence against appellee Jerry Matyiko" the
Corporation's statement of intent to dissolve, but we refused that
assignment of cross-error at the time we awarded the Commissioner
an appeal. So Jerry Matyiko is seeking to revive a dead issue.
No cross-error was assigned with respect to James Matyiko, which
is understandable. In his capacity as corporate secretary, he
signed the statement of intent to dissolve, which listed him as a
director. So, beside being late, James Matyiko seeks to raise
what, in the most charitable of terms, may be described as a
meritless claim. In any event, none of this offers any reason for
this Court to refrain from entering final judgment.
In his motion for judgment, the Commissioner sought recovery
of $137,965, which equals the amount of the excess payment in the
"drawdown," plus 8% interest from March 28, 1985, the date the
certificate of take was filed, until paid, plus costs. However,
the Commissioner now asks for judgment in the lesser amount of
$105,765, which equals the amount included in the "drawdown" for
damages to the residue, plus the same provisions for interest and
costs. Accordingly, we will enter final judgment against the
defendants in favor of the Commissioner for $105,765, plus 8%
interest from March 28, 1985, until paid and costs.
Reversed and final judgment.